Conflict Leadership

Michael Leathes

In early 2009, a dozen General Counsel of international companies co-authored an article entitled The Perfect Storm. The factors feeding the storm were cited as economic and financial turmoil, the drive by corporate law departments for greater control over outcomes, and new Information and Communication Technology capabilities. The authors predicted that energy generated by this triple convergence would radically change the attitudes towards disputes held by both the supply and demand sides of the legal services market. It spells opportunity for those acting on President Obama’s The world is changing, and we must change with it, and loss for those that don’t, or drag their heels.

Control

The control factor is one that individual General Counsel can really influence. Control is central to modern expectations of Good Corporate Governance, underscored by Section 404 of the Sarbanes-Oxley Act but extending far beyond financial reporting and risk assessment to embrace any significant risks that can have financial consequences. Litigation is inevitably such a risk for all parties. Exerting greater control over litigation has become a top priority for most organizations.

Controlling litigation

Litigation is not just a risk; it is one that cannot be controlled. A third party – a judge or arbitrator – is the one in control through their authority to impose a judgment or award. Advancing strong arguments is a proper attempt to exert influence, but is not an instrument of control. Exerting more effective control over litigation entails much more than delegating to competent litigators. It involves negotiating an acceptable settlement.

Do we have a conflict – or does the conflict have us?

In his book Confronting Conflict (1999), the Austrian political scientist, economist and mediator Friedrich Glasl described a ladder with nine rungs or levels that typified the life cycle of disputes. At the bottom end of the ladder comes the positions taken by the parties; Rung 2 is the polarization of those positions, and Rung 3 the deterioration of communication and the start of mutually recriminatory acts by the parties. Dr. Glasl identified Rung 3 as the limit of self-help in resolving the dispute. Then comes the Tipping Point when, as Glasl put it, we no longer have a conflict, rather the conflict has us. This is the stage at which litigation and arbitration replace self-help as the primary resolution method. Rung 4 sees the deployment of tactics, Rung 5 is loss of face and increasingly personal attacks, and Rung 6 represents the point at which threats become strategic. Harmful blows follow on Rung 7, supplemented on Rung 8 by the parties’ goals no longer being confined to winning but also to destroying. On Rung 9, the parties enter a mutually-destructive abyss.

While every conflict is different from every other, Glasl’s Escalation Ladder is helpful in focusing not merely on the need to manage disputes, but to lead the way to an early resolution and avoid an inevitable and uncontrollable escalation. Mature in-house counsel know that once they get past the self-help limit at Rung 3 on the ladder, they are locked into a spiral binding from which there is no easy way out. Whether the resolution requires negotiation, mediation or some other process, taking direct control over the potential outcome and the process to reach it requires strong doses of leadership, vision, determination, innovation and, often, courage.

Litigation is no place for romance; hope is no instrument of control

Hyperactive preventive counselling is essential. There is no such thing as a cast iron case but it is human nature to fall in love with the strength of our arguments and our sense of justice. Legal action is no place for romance. The best we can do is put forward the most persuasive argument in the hope that it prevails in the final judgment or award. Hope is no instrument of control. In about 50% of all cases that hope turns into despair.

Negotiation, on the other hand, is a very powerful instrument of control. It offers many more options for achieving an acceptable and certain outcome, usually much faster and cheaper than litigation or arbitration, and negotiators remain in control over what they are prepared to agree. The options are much more numerous because factors outside the scope of the dispute can be brought into play to help find a mutual settlement basis.

Leading is much more than Managing

A few years ago, litigation or arbitration were things we were expected to manage. Usually, this was a corporate euphemism for delegating real influence to outside counsel. We pretended to be in control by virtue of our status as the client, but in reality we mainly monitored the situation, commenting here and there, paying the bills and riding out the risk, while escalating claims and counter-claims, allegations, tactics, smoke screens, costs and risks took command. Control was impossible. We were obsessed with doing things right – a mark of a manager – not doing the right things (a mark of a leader).

Today is so Yesterday

This is not Good (or acceptable) Corporate Governance in the 21st Century. Intel’s motto Today is so Yesterdayreinforces the significance of change. Tomorrow, if we don’t imaginatively lead our way to avoid disputes, or drive for an early resolution of those that escape our avoidance efforts, we will rightly be judged passive and ineffective, consuming value rather than adding value. And possibly in violation of new performance norms being imposed on corporations by law.
The pendulum has swung from managing risk to the leadership activity of avoiding it in the first place, and then when it is unavoidable to resolving it and prioritizing the achievement of an acceptable outcome as soon as possible.

Let’s admit, however, that arbitration or litigation is sometimes necessary. There are situations, like test cases, where a precedent is important, or where interim relief is needed, where an alternative way forward truly is impossible or even undesirable. Those cases need measured, honest, objective and regular assessment.

Breaking the Spiral Binding

When parties are past Rung 3 on Dr. Glasl’s escalation ladder, past the Tipping Point, they are probably incapable of initiating productive dialogue. Each will most likely feel that any attempt to propose a way forward will be misinterpreted as self-doubt or loss of face. Private desires to settle therefore lay dormant and unexpressed. This is the stage at which mediation comes into its own as a risk control process. But how to get to a mediator? If I propose mediation, will the opponent think I need to settle, that I feel weak? Might it prompt an “Ah-Ha!”reaction and have just the opposite effect?

So it is that mediation often does not get proposed or gets rejected because the other side misinterprets the signals and draws strength a perceived weakening opponent.

There are many ways to overcome this conundrum. Not letting a conflict get past Rung 3 is an important conflict avoidance and preventive law strategy. For the cases that are already up there on the ladder, or crawl up anyway despite all efforts, deliberate action is needed to break the spiral. Some options are set out below.

Re-wiring

Most change begins with leadership and inspiration from the top. The generation of a genuine conflict avoidance mindset and culture is a first step. Lawyers do avoid conflict by instinct. Disputes are familiar ground and we have been trained to relish them. We are experts at tactics, litigation, defensiveness, advocacy, positional bargaining. “It’s what I’m paid to do.” When an attorney moves from a law firm to a corporate law department, most need re-wiring. Their attitudes need to change, as do their perceptions of the goals. What drives up stock prices has more to do with gaining early certainty than eventually winning all cases. Average law firm profitability is driven by the opposite.

To change a corporate mindset, entails changing the expectations placed upon people within the organization as well as those outside it and providing the skills and tools needed to implement it. This change must be visible and felt subcutaneously throughout the organization and beyond. It needs to be based on strength and confidence, pragmatism and governance principles. The leadership will want to be seen to practice it in person and explain actions taken, because any lack of conviction or passion is soon felt by those that hang on the leadership’s every word and deed.

Change-ability begins at Home

Changing mindset can be achieved internally as a starting point. Internal conflict, something that all employees watch with unbridled intensity, is a great arena for proving, and testing, new ways to do things. Sometimes, though, it is so subtle that the relevance of a conflict avoidance strategy must be explained if it is to be appreciated and understood. Avoiding and resolving internal conflicts is a relatively safe place to begin.

Conflict Avoidance Systems are mainly a new phenomenon. In Designing Conflict Management Systems (Jossey-Bass 1996), Costantino and Merchant explained that most companies fail to take a systematic approach to their conflicts, somehow content to manage them in a piecemeal, ad hoc fashion as isolated events. They rarely examine their disputes in the aggregate to reveal patterns and explore efficiencies. This book explained the need to view conflict management systemically, with a wider perspective.

The year that book was published coincided with General Electric beginning such a systematic, company-wide approach to conflicts tied to their Six Sigma quality initiative revolving around DMAIC – Define, Measure, Analyze, Improve, Control. Litigation was seen as adversely impacting quality in five ways – speed, cost, management time, business relationships and outcome certainty and was considered a Defect. GE evolved a system that required the early involvement of counsel, early case assessment (including business, technical and legal aspects), defining the company’s goals and understanding the other side’s likely interests, agreeing with the other side the best dispute resolution methodology, identifying who owned the dispute and measurement of costs, savings and cycle times. The system, which has evolved and improved over time, enhanced the business reputation of in-house counsel as problem-solvers rather than process-chasers, significantly reduced major litigation, generated substantial savings in legal fees and increased productivity (as a result of reduced cycle times and higher quality results).

Georgia-Pacific, a leading international pulp and paper products company based in Atlanta and now part of Koch Industries place special emphasis on systematic Early Case Evaluation. Their legal team secured top management buy-in to a conflict resolution program that involved training, the inculcation of a resolution mindset through, for example, multi-step dispute resolution clauses in contracts, the development of real in-house expertise in the dispute resolution field, being willing to litigate when necessary and measuring the results. In the 12 years from 1995 to 2006, Georgia-Pacific have estimated their savings from the program at $44.8m.

AkzoNobel, the world’s largest paints and coatings company have a similar program. Starting with a Board policy encouraging early resolution and a clear reporting structure and process, AkzoNobel appoint case teams Through training, they ensure in-house specialists know the wide variety of conflict resolution tools and practices, and they systematically analyse risk in each case using business-led case teams. The Company uses multi-step dispute resolution clauses and evaluates and measures results. Early Dispute Resolution has been used on many different cases including IP infringement, M&A, insurance claims and an alleged monopoly abuse action.
Understanding these and other examples is important to gain inspiration, but every company needs a system tailored to their special needs. Tina Monberg’s Handbook of Human Conflict Technology sets out the components of many different systems. Each needs to be tailored to individual organizational needs. Most begin with an analysis of how things are done (or not done) at present, an inventory of current skill sets, and a benchmarking against organizations with successful systems already in place. Are conflict avoidance targets already set? How stretching and realistic are they? Are legal managers adequately equipped, educated and motivated to implement those targets? Is there a policy for insisting on multi-step dispute resolution clauses – including a mediation step – in contracts? How competent are mangers to negotiate unaccompanied? Are cases regularly assessed for early settlement potential? If so, are the right criteria applied by those with the right skills? How clear are the expectations? Is data captured to measure efficacy and progress, and track risk reduction benefits and cost savings? A rounded conflict management system can work wonders. Many systems appoint senior executives as champions, leading and teaching by example.

Early Case Assessment tools are easy-to-implement and convey the mindset effectively. They work best when conducted collaboratively with outside counsel.

Training and coaching delivered by professionalsunderpins mindset change. Mediation training is a great way to inculcate an interest-based negotiation ethic and skill set within a team. Many courses have the power to change how in-house lawyers feel about themselves, their role within the company and the value they can add. They usually emerge much less self-focused and political and as stronger team players. Training opens their minds to other outcome options. And that’s just the basic, 5-day type of mediation training. Advanced training can cover new negotiation techniques, the art of getting parties to the table in the right frame of mind, recognizing the time to litigate and the time to settle and breaking deadlocks. There are also great mediation advocacy courses to help prepare negotiators for a mediation and to play a proactive role in negotiations.

Internal Training can supplement external training by applying the skills learned to the company’s needs. Implementing dispute resolution clauses, choice of counsel and, where required, choice of mediator, liaising with opponents and early case assessments.

Role-playing predicaments – such as upcoming settlement or deal negotiations – is a powerful way to hone negotiation strategies, understand the other side’s possible options and to be better prepared. The act of writing the roleplays entails focusing hypothetically on the other side’s case and interests as well one’s own side – is by itself a useful discipline. New ideas, strategies and options often emerge from the process and subsequent debate and feedback, as well as being fun training for all involved.

Decision Trees and other guidance notes help in–house counsel to make the right process and personality choices when considering a mediation and not be wholly reliant on advice from outside counsel. Finding the right mediator and whether to use a process administered by a service provider can be easily facilitated through decision trees – see: http://imimediation.org/decision-tree.

Large Projects can gain value from having a conflict avoidance capability, bringing a useful opportunity for in-house counsel to practice conflict management skills as a neutral. Many companies encourage conflict among different functions as a way to bring out the best decisions, but must also prevent that conflict becoming destructive.

CLE/CPD events can be organized internally with an emphasis on conflict avoidance, including lawyers from other companies to relate their own experiences.

Multi-Step Dispute Resolution Clauses are common these days, yet so many law firms fail to insert them and so many deals are still made without them. Having a contractual obligation, on all parties, to mediate before arbitrating or litigating completely avoids any weakness perception entailed in proposing mediation, because it is already agreed.

Dispute avoidance management objectives and reward programmes exist in some companies. They need careful implementation to ensure that inappropriate motivations for settling are excluded, but are a great way to convey and embed mindset change.

Visible Line Management Buy-In gives culture and mindset change that sense of authenticity and relevance to the business. It can take many forms, but real change cannot be achieved without it.

Corporate Ombuds, who often report to the GC or an independent director, can have a major impact. Their very existence, coupled with transparent results-based reporting, can send a powerful cultural message internally and externally. Ombuds can have a range of functions. Some are focused on resolving employee conflict between management and unions or between employees and management. They can have a fact-finding function and in some organizations Ombuds get engaged in conflicts between the company and its suppliers and customers. Some specialize in the delivery of employee communications programs and others have mentoring, whistle-blowing or community outreach functions. Companies such as Chevron, Coca Cola, Mars, Shell and United Technologies have an Ombuds function as well as many universities and international NGOs like the WHO.

Impact on outside stakeholders

All companies have a reputation platform. Whether they consciously manage it in the context of their dispute profile is another issue, but if they do, as they should, then the legal function plays a key role. How external stakeholders, including competitors and regulators, perceive the company’s legal strategies, attitudes, competencies and actions plays an inevitable role in conflict avoidance, enforcement, negotiating position and many other capacities. Having the right outside profile, one generating respect, particularly within the relevant Industries, in government circles and on search engines, is well understood. It’s a kind of branding. Like branding, it involves subtle messaging.

Most parties engaged in conflict live in fear of being perceived as weak, and rightly so. Most, however, go about enhancing their reputation for strength in the wrong ways. Threatening behaviour merely invites a threatening response, distrust and a lack of respect. Parties with the resources to respond in like fashion will do so, and everyone climbs Glasl’s escalation ladder as if they were choreographed. Mahatma Gandhi observed: An eye for an eye, and soon the whole world is blind.

There are many less primeval and smarter, more subtle ways to foster the right perception of strength through pragmatism without any hint of weakness or hesitation. One way – poorly understood and often dismissed as a distraction – is the importance of presenting at conferences and symposia, and writing articles. Every GC needs to manage their Google Profile with care. It’s a key part of their organization’s reputation. Yet few do.

Corporate Policies have an important internal and external power. A published policy that expresses a desire wherever appropriate to resolve matters at an early stage, is a perfect excuse for approaching the other side with a mediation proposal and avoids a weakness perception. Such policies cost nothing and do not limit freedom of action.

Managing relations with competitors is often high on the list. It’s about how one acts and how those acts are perceived. The messages are often very subtle. The GC is well positioned to take the lead to avoid antitrust pitfalls. Proposing mediation to aid relations with governments on regulatory issues that involve various players within an Industry is a good way to communicate an inclination to mediate as a pragmatic process solution without in any way suggesting that it is driven by a sense of weakness. That propensity can then be applied in different contexts in inter-company conflicts with the same effect.

Deal Mediation is an emerging area having great potential. Because the settlement of a dispute is a deal, why confine use of mediation to situations with a conflict background? Some people have a negative reaction to this idea, believing that they do not need a mediator to help them negotiate, which is the job they are paid to do. That, however, is very superficial. Mediation takes the process and communication distractions away from the parties, enabling them to be more effective negotiators, improving the quality of their deals. And having a mediator present during a deal negotiation helps avoid failure.

Settlement Counsel are increasingly used by companies in conflict situations because this simple approach offers a perfect way to focus outside counsel on deal making rather than litigating. Boston Law Collaborative sums it up this way: [In this] process … both parties are represented by counsel, but the parties and their attorneys agree, in writing, to attempt to settle the matter without litigation or even the threat of litigation. They promise to take a reasoned stand on every issue, to keep discovery informal and cooperative, and to negotiate in good faith. If either party seeks intervention from a court, both attorneys must withdraw from representation.

Hybrids should always be considered. Because ADR is inherently consensual on a process level, the process can always, with agreement, be adapted to suit the needs of each case – unlike litigation. There are different dispute resolution processes, some of them consensual and non-binding, others adjudicative and binding, and consequently there are a multiplicity of hybrid processes that can be envisioned to combine two or more of them. An example is Arb-Med. The parties chose a neutral to wear two hats (or it could be two neutrals, each wearing a different hat). First, the neutral acts as a conventional arbitrator but when the parties have made their representations, the neutral writes an award and seals it in an envelope without disclosing its conclusion to the parties. The neutral then stops being an arbitrator and becomes a mediator with the goal of aiding the parties to reach a consensus. The parties agree in advance that if they fail to reach a settlement by a certain time in the mediation phase, they will open the envelope and be bound by the decision it contains. Usually, they also agree that if a settlement is reached, the envelope is opened only if both or all parties agree. The underlying psychology provides a powerful and equal influence on the parties to settle. For more details on this process see: www.imimediation.org/?cID=129&cType=document.

Outside Counsel need to understand the mindset of their clients in order to service their needs properly. They represent an important element in conflict management. Client expectation needs to be communicated, their contribution constantly monitored and their value fully leveraged. Many are re-wiring themselves from Litigators to Resolvers but some still dismiss mediation as the lawyers’ equivalent of homeopathic medicine, and consider ADR as Alarming Drop in Revenue. But as their clients change, they change.

Payback

In 2003, the American Arbitration Association/ICDR published study based on analysis of 250 large and medium-sized companies. It found that some were “Dispute-Wise” while others were not. “Dispute-Wise” companies were those that focused on preserving relationships, had a strong inclination to outcomes and certainty, were enthusiastic about ADR and less committed to litigating all cases on principle. The results indicated that Dispute-Wise companies held more sustainable relationships with third parties and had 28% higher price/earnings ratios than the average of all public companies. The most “Dispute-Wise” had 65% higher P/E ratios than the least Dispute-Wise. Coincidence?

Tomorrow’s Answers Today

AkzoNobel’s motto Tomorrow’s Answers Today captures the very essence of dispute resolution. Igniting an explosion of ideas, to use Frans Johansson’s phrase in The Medici Effect, is what is needed in this important field of human endeavour. The ideas expressed above hardly scratch the surface of conflict avoidance and resolution. There are many other possibilities – mini-trial, early neutral evaluation, baseball arbitration, evaluative and transformative mediation models, neutral fact-finding, and so on. Nobody has a monopoly on ideas and they are there to inspire and be used. The art is to know they are out there, understand them, see what worked for whom and why, continually inherit the latest thinking and to have the wisdom and creativity to keep adapting.

That’s Conflict Leadership.

This Article is based on a presentation made to 24 General Counsel and Legal Directors of international companies meeting in Frankfurt, Germany on September 3rd 2009.